SGH Insight
(1A) If You Don’t Have Time This Morning
The Fed will leave rates unchanged at this next meeting. Recent Fedspeak has been more aggressive than necessary to reinforce the expectation that rates will end the week unchanged and instead is more consistent with the Fed setting up for an extended pause. That said, we are going into the week with very low odds for a rate hike in December but it’s unlikely that Powell will close the door entirely on another rate hike
(1) The Federal Reserve will leave interest rates unchanged at this week’s FOMC meeting. This really isn’t in question at this point. At the September FOMC meeting, Powell signaled a likely pass at this next meeting while Fed speakers since have made no effort to push back on that expectation despite a steady flow of hawkish data.
(2) The Fed thinks, or maybe just hopes, it has likely finished hiking rates for this cycle. With policy rates now above inflation and a disinflationary trend in place, the current level of rates allows the Fed to move more cautiously. That also means policy is more resilient to stronger-than-expected data such as that seen in recent weeks. The Fed appears content to wait a few months to see if the economy remains on path to price stability before considering the need for another rate hike.
(3) Tighter financial conditions argue for additional patience on the part of the central bank. The Fed had been coming around to the idea that the policy rate was already high enough to restore price stability before the recent runup in longer-term yields further tightened financial conditions. While growth has been faster than the Fed expected, the Fed sees higher yields as the market working to counter that growth and substituting for additional rate hikes.
(4) Powell will not declare that the Fed has concluded with rate hikes for this cycle. Although the risks to the outlook are more balanced, with growth accelerating it must be the case that the risk to inflation is higher than the risk of recession, and that means there is scope for another rate hike. Moreover, the Fed won’t want financial conditions to ease too early, and one way to prevent that is to always dangle another rate hike in front of us.
(5 )It’s almost certain that journalists will be looking for some clarification on the dots. Governor Chris Waller raised the bar to another rate hike, arguing that if the economy evolves generally as expected in the SEP, he does not expect another rate hike will be necessary in contrast with the additional hike penciled in the SEP. If you can’t get the hawks on board with another rate hike, it isn’t happening. The dovish commentary overall from Fed speakers suggests that many of the 12 participants that anticipated another rate hike in this cycle have already erased that hike from their forecast.
Market Validation
(1A) FOMC press conference 11/1/23
The Committee decided a today's meeting to maintain the target range for Federal funds rate as 5.25 to 5.5 and continue the process of significantly reducing our securities holdings. We are committed to achieving a stance of monetary policy sufficiently restrictive to bring inflation sustainably down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. We are attentive to recent data showing the resilience of economic growth and demand for labor. Evidence of growth persistently above potential, or the tightness in the labor market is no longer easing, could put further progress on inflation at-risk and could warrant further tightening of monetary policy.
(1) Wall Street Journal 11/1/23
WASHINGTON -- The Federal Reserve held interest rates steady at a 22-year high but kept the door open to potentially raising them later to keep slowing inflation.
Officials described recent economic activity as strong and highlighted how a run-up in long-term interest rates could weigh on economic activity, according to a statement after their two-day meeting.
(2) Bloomberg 11/1/23
Federal Reserve Chair Jerome Powell said the US central bank is “proceeding carefully” with further tightening, given how far it’s come to date.
“Given how far we have come, along with the uncertainties and risks we face, the committee is proceeding carefully,” Powell said Wednesday during a press conference after the central bank’s latest two-day policy meeting.
“We will make decisions about the extent of additional policy firming, and how long policy will remain restrictive, based on the totality of the incoming data, the evolving outlook and the balance of risks,” he said, referring to the policy-setting Federal Open Market Committee.
(3) FOMC press conference 11/1/23
we are attentive to the increase in longer-term yields which have contributed to a tightening of broader financial conditions since the summer. As I mentioned, persistent change ifs broader financial conditions can have implications for the path of monetary policy. In this case the tighter financial conditions we are seeing from higher long-term rates and also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied. The first is the tighter conditions would need to be persistent. And that is something that remains to be seen. But that is critical. You know, things are fluctuating back-and-forth. That is not what we are looking for. With financial conditions we are looking for persistent changes that are material. The second thing is that the longer-term rates that have moved up, they can't simply be a reflection of expected policy moves from us that we would then, if we didn't follow through on them, then the rates would come back down. I would say on that, it does not appear that an expectation of higher near-term policy rates is causing the increase in longer-term rates.
(4) FOMC press conference 11/1/23
>> Mr. Chairman, I assumed there was a tightening bias in the economy. You look at the tightening stance policy to the extent you may need to additionally hike, but you didn't say earlier super sufficiently restrictive among forecast or rate hikes among most members of the Committee. But then you said you haven't made a determination. Would you say the bias right now is it is neutral, and the Committee has moved largely off of this forecast for two hikes -- I am sorry, one additional hike? >> CHAIRMAN POWELL: No, I wouldn't say that at all. I would say, the language looking at it here, in determining the extent of additional policy-firm that may be. >> CHAIRMAN POWELL: To return inflation to 2% over time, that is question we are asking. >> Is it right to think of that as a bias still in the Committee here? >> CHAIRMAN POWELL: We haven't used that term but it is fair to say that is the question we are asking, should we hike more. In September we wrote down one additional rate hike, but, you know, we will write down another forecast, as you know, in December
(F) >> CHAIRMAN POWELL: Let's talk about the dot plot first. The dot plot is a picture in time of what the people in the Committee think is in light of personal policy in light of their own personal economic forecast. In principle, when things change, that is not planned that anybody agreed to or we will do. That is a forecast that would change, for example. I mean, many things could change that would cause people to say I would not write down that dot six weeks later. Think of the number of things that could change your mind on that. I think the efficacy of the dot flat probably decays between the three month period between that meeting and the next meeting. But nonetheless it is out there. We personally update the forecast but we don't formally update the dot plot. So, we are trying to be transparent about how we think about these things.